Krone Strength Tests Long-Standing Correlations

The Norwegian krone has staged an impressive rally in the last month against both its Swedish cousin and the euro.

The krone’s outperformance can be quite easily explained by the resilience of Norway’s domestic economy, surging oil prices and, at least until recently, robust market appetite for such “growth assets.” It hardly hurt that Norway’s central bank didn’t seem terribly concerned about its currency’s rise either.

This plethora of support stands in contrast with the situations in both Sweden and the euro zone. The Riksbank cut interest rates in February, citing its fears for Sweden’s economy as the euro zone languished, and said rates were likely to remain low into 2013. The European Central Bank unleashed another torrent of cheap money for its own commercial lenders just last week.

So, there are good reasons for Norway’s divergence: the pleasures of being a vast oil exporter and outside the euro zone are plain for all to see.

However, the negative three-month correlation between the EUR/NOK cross and NOK/SEK has also increased significantly as a result of Norway’s time in the sun, and now analysts at CitiFX suspect that it may have gone too far, having fallen this year to a pretty robust minus 0.6, from a negligible 0.2 in the middle of 2011.

While not without precedent, decoupling between the two crosses in recent years has been short-lived and has in time come to be seen as only a temporary dip.

Add a Comment

Thanks for reading The Source. We would like to direct you to MoneyBeat, the Wall Street Journal’s brand new global blog. MoneyBeat unites MarketBeat, The Source, Overheard and all the Deal Journal blogs, bringing together all the market, M&A, IPO and hedge-fund news from those blogs into a 24-hour hub for finance news. Check it out and let us know what you think at moneyblog@wsj.com.